India's central bank cuts key rates, releases more money

Indo Asian News Service

29 January 2013

Mumbai, Jan 29 (IANS) Interest rates on automobile, housing and commercial loans could come down and banks will have Rs.180 billion more to lend, as the Reserve Bank of India (RBI) Tuesday cut key rates, but just a tad to spur growth and keep inflation in check.

The repurchase rate, or the interest on short-term borrowings by commercial banks, has been cut by 25 basis points to 7.75 percent. The reverse repurchase rate, or interest on short-term lending, also stands lowered by 25 basis points to 6.75 percent.

This measure has the potential to lower the cost of borrowings for commercial banks. If it is passed on to customers, it has the potential to bring down interest rates on loans taken by households and commercial sector.

In another move, the cash reserve ratio, or the money commercial banks have to retain in the form of liquid assets in proportion to their deposits, has also been lowered from 4.25 per cent to 4 percent.

"This reduction in the cash reserve ratio will inject primary liquidity of around Rs.180 billion into the banking system," RBI Governor D. Subbarao said in his third-quarterly review of the monetary policy for the current fiscal.

The central bank had cut interest rates last in April.

"The reduction of both cash reserve ratio and repurchase rates are the steps in the right direction. But the system has to take this in the true spirit and the benefits have to be passed on to the end users," Assocham president Rajkumar N. Dhoot said.

Subbarao said the review addressed three main issues -- to provide appropriate interest rate regime to support growth with moderating inflation risks; to contain prise rise; and to ensure enough money in the system for credit to productive sectors.

Making some projections on the Indian economy, the central bank governor said the growth rate for the current fiscal was being pegged at 5.5 percent against 5.8 percent earlier, while inflation rate was expected at 6.8 percent March-end, against 7.5 percent.

The central bank also expressed concern over widening current account deficit, caused by high value of imports against exports, at historically-high levels, especially in the context of a large fiscal deficit and slowing growth.

On inflation, the bank said in the past three years the price rise was caused by both high demand and lower supply. Now with demand pressures down, it was imperative to address the supply-side constraints to keep inflation under check.

"Inflation has come off from its peak, but its further downward movement is going to be slow and gradual. On the other hand, economic activity has slowed, trailing well below its potential and opening up a negative output gap," Subbarao said.

"The Reserve Bank of India, on its part, will have to calibrate monetary policy to the evolving growth-inflation dynamic and the management of the twin deficits risks."

The announcements, which were more or less in line with the expectations, but for the surprise cut in cash reserve ratio, cheered the markets, helping the sensitive index (Sensex) of the Bombay Stock Exchange gain nearly 62 percent, or around 0.30 percent.